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Aegion Q3 Earnings Miss Estimates, Shares Fall

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Shares of Aegion Corporation (AEGN - Snapshot Report) fell 14% since the company reported its third-quarter 2013 results on Oct 29. Adjusted earnings from continuing operations fell 14% year over year to 44 cents per share, missing the Zacks Consensus Estimate of 55 cents. While the North American Water and Wastewater business excelled in the quarter, performances by its Energy and Mining as well as Commercial and Structural businesses were disappointing.

Including acquisition related expenses and credit facility fees of 6 cents per share, earnings came in at 37 cents per share in the reported quarter, compared with 50 cents in the prior-year quarter. Earnings in the year-ago quarter included acquisition related expense of a penny.

Operational Update

Total revenue was $308 million in the reported quarter, up 17% year over year. The growth was driven by increased revenues in the North American Water and Wastewater segment, partly offset by decreased revenues from the Bayou Coatings operations. However, revenues fell short of the Zacks Consensus Estimate of $340 million.

Cost of sales increased 19% to $238 million from $200 million in the year-ago quarter. Gross profit rose 10% year over year to $69 million. Gross margin contracted 130 basis points (bps) year over year to 22.6%.

Adjusted operating expenses went up 13% year over year to $48 million. Adjusted operating income was $24.3 million, down 11.5% year over year, leading to a 250 bps contraction in operating margin to 7.9%.

Segmental Performance

Revenues from the Energy and Mining segment grew 22.8% year over year to $168.7 million. The segment’s operating income went down 40% year over year to $12.9 million, due to lack of project activity and decline in international market conditions for United Pipeline Systems.

The North American Water and Wastewater segment’s revenues increased 23.4% year over year to $96 million compared with $77.8 million in the prior-year quarter. The segment’s operating income rose 64% year over year to $10 million. The growth was driven by increased volumes across all geographies.

Sales from the International Water and Wastewater segment were $27.7 million, down 5.8% from the year-ago quarter. The segment reported an operating loss of $0.25 million, narrowing from loss of $3.2 million in the year-ago quarter. Lower workable backlog, project performance issues, customer-driven project delays and fewer high margin pipeline projects resulted in the loss; compensated by a large manufacturing order for Canadian operations.

Revenues in the Commercial and Structural segment declined 15.5% year over year to $16.8 million. The segment reported an operating loss of $0.9 million versus an operating income of $2.3 million in the year-ago quarter.

Backlog

Consolidated backlog in the third quarter went up 38% year over year to $714.6 million (including Brinderson backlog of $209.2 million). Contract backlog in the North American Water and Wastewater segment was a record $241.7 million in the third quarter, up 44.5% from the year-ago quarter. Global Commercial and Structural backlog grew 3.2% year over year to $48.2 million. However, backlog in the Energy and Mining segment declined 30.1% year over year to $172.5 million. The International Water and Wastewater business also recorded a decrease of 22.7% to $43 million in contract backlog.

Financial Update

As of Sep 30, 2013, cash and cash equivalents amounted to $126.7 million versus $133.6 million as of Dec 31, 2012. As of Sep 30, 2013 long-term debt increased to $366.5 million compared with $221.8 million as of Dec 31, 2012. Debt-to-capitalization ratio was 35% as of Sep 30, 2013 compared with 26% as of Dec 31, 2012.

Cash flow from operating activities was $31 million in the quarter versus $58.7 million in the prior-year quarter. Capital expenditure in the quarter declined to $20 million from $33.7 million in the year-ago quarter.

Outlook

For full-year 2013, Aegion revised earnings per share guidance (inclusive of the Brinderson contribution) to the new range of $1.45 to $1.50 from $1.58 to $1.70. Revenues for the full-year 2013 are expected to be between $345 and $350 million and the estimated operating margin is in the band of 8–9%. Aegion lowered full-year outlook for cash flow from operations to $90 million from $100 million.

The company projected full-year revenues in the range of $465 to $470 million, excluding contributions from Brinderson acquisition in the Energy and Mining segment. Operating margins are forecasted in the range of 9–10%.

The International Water and Wastewater segment remains on track to deliver operating income in the range $3–$4 million for the European business, while the Asia-Pacific region will have a modest operating loss of around $1.0 million. The North American Water and Wastewater segment is expected to return to profitability in the fourth quarter driven by efforts to enhance the sales and strategic investments.

The company anticipates that the Commercial and Structural segment will deliver revenues in the range of $75 to $80 million with a growth rate of 20–25%. The guidance range for gross margins is 35–40%. Aegion expects the segment to return to profitability in the fourth quarter.

Chesterfield, Missouri-based Aegion is a diversified building and construction company which provides infrastructure protection, proprietary technologies and facilities. It also offers services related to the rehabilitation and improvement of sewer, water, energy and mining piping systems.

Aegion currently carries a Zacks Rank #3 (Hold). Other better-placed stocks in the building and construction industry are Masco Corporation (MAS - Analyst Report) and Trex Co. Inc. (TREX - Snapshot Report), both carrying a Zacks Rank #2 (Buy). Another one of Aegion’s peers, Armstrong World Industries, Inc. (AWI - Analyst Report) reported an 11% decline in adjusted earnings to 87 cents per share. However, earnings were ahead of the Zacks Consensus Estimate by a penny.

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